As Muni Bond Fund Outflows Continue, Citi Likes Puerto Rico

By Dimitra DeFotis

Municipal bond fund flows were considerably less negative for the week that ended September 18.

Citibank notes that municipal bond funds have seen outflows of $40.25 billion so far this year, and assets under management are down $70.6 billion, or 11.75%, since the start of the year. However, for the latest week, Citi notes that the net outflowsrelative to the prior week were striking in long-term and high-yield funds:

Flows into long-term funds were -$473 million vs. -$1.04 billion the prior week.

Flows into high-yield funds were +$181 million vs. -$168 million the prior week.

Flows into intermediate funds were -$294 million vs. -$658 million the prior week.

Flows into limited/short funds were -$335 million vs. -$205 million the prior week.

Citi analysts George Friedlander, Mikhail Foux and Vikram Rai write, “It has been our view that the nascent muni market rally probably had significantly further to run, particularly in high-yield sectors, in large part because the muni market as a whole is slightly undervalued.” Citi’s recommendations:

In Puerto Rico go up in maturity, down in coupon gravitating to bonds with lower dollar prices.

Recall that colleague Andrew Bary wrote the Aug. 26 Barron’scover story detailing Puerto Rico’s financial woes. The Government Development Bank for Puerto Rico response said it “has made significant progress in addressing its financial challenges and continues to focus on taking aggressive action to achieve fiscal stability and promote economic growth.” More on our income blog here.